CONTRACTION IN CHINA

The International Monetary Fund last month cut its global growth forecasts for 2019 and 2020 with the warning that “risks (...) tilt to the downside.”

The European Commission has this week done the same to euro zone growth and there are signs of manufacturing weakness spreading across Asia.

But the two most important indicators for Doctor Copper are China’s manufacturing purchasing managers indices (PMIs).

Both fell into contraction territory below 50 in December and both stayed there in January. There was some stabilisation in the official PMI last month but the Caixin Index, a more accurate barometer of health in China’s smaller company sector, fell again to 48.3, its lowest reading since February 2016.

Recent history shows that weakness in China’s PMIs is never good news for the copper price.

The last time the indices fell through the growth-contraction threshold was over the course of 2015-2016, which marked a cyclical low point for the copper price.

That also marked the Chinese government’s last attempt to engineer a slowdown in its economy.

Beijing hit the brakes too hard and unleashed another round of corrective stimulus. That’s the one it was mopping up last year until growth started stalling again.

A new stimulus package, a mix of fiscal, monetary and infrastructure measures, is already now working its way through the Chinese economy.

But will it be enough? And how long will it take to reinvigorate Chinese manufacturing?

NO SHOCK, NO AWE

The Chinese cycle of engineered boom and slowdown is now on its third rotation after the shock and awe stimulus of 2009-2010 and the less shocking and less awesome stimulus of 2015-2016.

This time around there was no shock at all. The metal markets spent the second half of last year talking about little else.

Gone too is any awe. Beijing has learnt its past lessons from simply tipping money into more construction and infrastructure.

There will be a sprinkling of both this time again.

And demand specifically for copper will get important micro boosts from the power and construction sectors, according to analysts at Citi.

The State Grid, a major component of China’s copper usage, is forecast by the bank to increase spending by 5 percent this year after a flat 2018. A surge in housing starts last year should also translate into a pick-up in copper-intensive completions this year.

But the larger impact on metals usage from the latest stimulus will come from the credit impulse that is now travelling down multiple pathways in the Chinese economy.

This stimulus creep will take some time to make its impact on actual manufacturing activity. Many analysts are pencilling in the second half of the year for a tangible rebound.

It’s what happens between now and then that is causing Doctor Copper consternation.

BULLS AND BEARS

Because that’s where any analyst consensus breaks down.

Citi is in the bull camp. The title of the bank’s Feb. 4 research note, “Let’s get loud - copper should rally by 10 percent”, tells you everything.

The 3-6 month forecast is predicated on copper’s own micro fundamentals, such as the expected boost to Chinese grid investment and low visible inventory.

Stocks registered with the London Metal Exchange, the Shanghai Futures Exchange and the CME registered only a highly modest collective build of 20,000 tonnes in January, a seasonal trough for global manufacturing activity.

At 371,000 tonnes combined visible exchange stocks at the end of January were 299,000 tonnes lower than one year earlier.

Moreover, Citi argues, the current slowdown evident in China’s sliding PMIs is in the price, leaving sentiment vulnerable to any positive surprises from China as it returns to work after the Lunar New Year celebrations.

Others take a diametrically opposed view.

Again, the title of Barclays’ Jan. 24 research note, “Copper - dancing on a precipice”, tells you much about its bearish stance.

“We believe that copper prices are about to decline even from today’s relatively low levels”. Barclays is looking for the copper price to break down from the current range to $5,500.

Sluggish Chinese activity ahead will test the market’s macro nerves. And while inventories are undoubtedly low, they contrast with weakening physical Chinese premiums and little sign of time-spread tightness on the London Metal Exchange, according to Barclays.

Both bulls and bears accept that copper’s short-term prospects remain beholden to progress, or equally the lack of it, in the ongoing trade talks between the United States and China.

The London copper market had a peek at the upper end of its range this week with a Thursday high of $6,289.50 per tonne.

President Trump’s (sort of) confirmation he did not plan to meet with Chinese President Xi Jinping before a March 1 deadline for a new trade deal has sent copper sliding back to $6,233.00 on Friday morning.

Trade war noise is a distraction for Doctor Copper as he weighs his core Chinese conundrum. Is the current bout of manufacturing weakness a blip before stimulus kicks in? Or is it a harbinger of something worse?

You’ll know when he’s made up his mind. The price will have broken its five-month trading range. But will it be to the upside or the downside?